Alexey Posternak Chief Financial and Investment Officer at INTEMA.AI.
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What does a venture fund focus on when evaluating a startup: breakthrough technology or revenue, founders' personalities or hard skills? Anyone who has applied for an accelerator program or raised a venture fund round has likely been asked these questions.
Experts from our firm interact with dozens of deep tech startups on a regular basis to find the best ones, using a multiparameter scoring system. Based on my experience, here is a basic outline of how accelerators and venture funds evaluate such startups.
Startup Evaluation At The Application Phase
A thorough examination of a startup begins as soon as the accelerator or fund manager receives an application. The venture fund will have a screening process to see the company's current standing, how well it fits the fund's investment focus and interests, to what extent it meets applicable mandatory criteria and whether there are any deal-breakers (reasons disabling the fund from striking an investment deal with the startup).
All funds look at and consider some basic elements, such as dynamics and traction, but each fund has its unique criteria and requirements. For example, our firm focuses on cutting-edge deep tech solutions that are hard to copy.
Some funds invest in the pre-seed round—the initial stage that only involves testing of primary business hypotheses and generation of a product's first version for users. In this case, the fund pays less attention to traction and revenue and focuses more on the team's competence, personal qualities and experience.
Selecting Participants
As soon as screening is over, a fund will deploy a scoring system that evaluates the startup using scores assigned to the company based on different performance indicators, their upward trend or the absence of an indicator. This is a formalized and harmonized methodology for assessing a startup's potential at any given point in time. The scoring and final grade may change over time. Many high-profile funds have their own scoring model. Ours evaluates each promising startup based on more than 300 parameters and does an in-depth evaluation of the product and technology to determine the company's true competitive power.
Funds with an extensive pipeline have a complex multistage selection system that helps them process numerous applications without overlooking a really promising startup, but also not over-staffing themselves with analysts and investment managers.
All scores are then combined into a total. Top-scoring teams will eventually receive investment or join the acceleration program, as applicable.
The purpose of a scoring system is to identify the top of the crop, potential market leaders, and to save on resources while dismissing subjective judgment. By the time an investment decision is due, the investment manager has explicit information in hand about:
• The team and its competencies.
• Product and metrics.
• Financial performance.
• Marketing process and hypotheses testing in lead generation.
• Sales and change process to reduce the cost of sales and increase revenue.
• The process of change management in the company.
• Reliability and innovation of technology.
• Code design and architecture.
• Models, datasets and AI application performance.
• Product economics.
• Scalability.
The fund manager can see what kind of resources the startup has and how much time the team would need to grow into a market leader. An accelerator would know how to build the most effective strategy for working with the team—for example, by focusing on technology improvements or on business metrics.
Basic Startup Evaluation Approach
While each firm's process differs slightly, here is a general description of how it might go. First of all, a fund will look at the team's previous accomplishments. In our case, we look for teams experienced in creating high-tech AI solutions. We believe that teams with strong engineering backgrounds are capable of creating tech-driven products.
Firms focused on technology startups will generally assign a dedicated expert to analyze the technology developed by the startup. The expert has their own checklist to determine, for example, the solution's architecture, efficiency of the development process, rate of change and speed of network training, constraints, backlog management efficiency, scalability of the technology and its applicability in other countries.
Product strategy (customer segments, value propositions, etc.), marketing, sales and financial metrics, change management and the team's working speed are evaluated separately. An expert from the investment department will evaluate market potential, competitive landscape, trends and prospects, as well as investment appeal.
This approach allows the firm to quickly identify growth areas and bottlenecks in all of the company's processes. And as they answer the firm's questions, founders often start looking at their business from a different angle.
A thorough startup evaluation model enables venture funds to identify, even at later stages, those processes where a team lacks "basic hygiene." This lack of hygiene would make the company's growth challenging, time-consuming and expensive. Some teams can't handle the sales pipeline correctly and do not see their growth points, while others fail to customize their solution's architecture to foreign markets.
Conclusions
In my experience, startups often find the evaluation stage very useful. It may open their eyes to challenges their teams have never even considered. After talking to a venture fund or accelerator, a startup often sees for itself what it needs to change in its existing processes or generates new hypotheses regarding a product's concept.
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